Tag: financial times

Financial Times Offers Wrong Response to China’s Steel Overcapacity

The Financial Times (FT) published a June 9, 2016, editorial titled, “Coping with a world of too much Chinese steel.”  (Link)  The editorial makes the case correctly that China’s steel overcapacity has spilled onto world markets and is having negative effects on steel makers in the European Union and United States.  It appropriately argues against Western governments nationalizing their steel industries or providing “other indefinite state support.” 

The editorial errs, however, in suggesting that “the best option is a judicious and limited use of trade remedies against subsidized imports.”  Economists have understood for decades that when a nation imposes trade restrictions, it always reduces its own economic welfare.  It is difficult to argue that imposing a policy measure that reduces a nation’s economic welfare is a good thing to do.  The country would have been better off simply by doing nothing.  (“Don’t do something, just stand there!”)

There are two easily understood reasons why imposing trade restrictions won’t help the situation.  The first is that the global overcapacity is so great that market prices for commodity grades of steel are low worldwide.  If imports of hot-rolled steel from China are limited by newly implemented antidumping or countervailing duty (AD/CVD) measures, relatively low-priced hot-rolled coil could easily be imported instead from countries such as South Korea, Brazil, or Turkey.  Curtailing imports from China is likely to provide relatively little relief to domestic steel manufacturers. 

The second reason is that restricting imports in an attempt to benefit steel producers will have the effect of increasing costs of production for manufacturers that use steel as an input.  These downstream users constitute a much larger segment of the economy.  In the United States, for example, data compiled by the Bureau of Economic Analysis (BEA) at the Department of Commerce indicate that economic value added by “primary metal manufacturing,” which includes steel, copper, aluminum, magnesium, etc., amounted to about $60 billion in 2014.  Downstream manufacturers that utilize steel as an input generated value added of $990 billion, more than 16 times larger.  Employment by primary metal manufacturers was 400,000, while downstream manufacturers employed 6.5 million, also 16 times greater.  Use of trade remedies against steel imports amounts to an attempt to benefit the few at the expense of the many.

To elaborate, the United States currently imposes some 150 AD or CVD orders against a large number of steel products from a large number of countries.  These restrictions have had the effect of making U.S. steel prices relatively high, while in the rest of the world they are relatively low.  Still, important portions of the American steel industry have not been sufficiently profitable.  United States Steel Corporation, the country’s largest producer, reported a 2015 loss of $1.5 billion.  So U.S. prices are somewhat high, but not high enough to cure the industry’s commercial problems.

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A Threadneedle Street Kerfuffle

On January 10, 2013, I penned a letter to the Financial Times, pointing out an error in its characterization of lending-of-last-resort operations. As the letter below describes, these central bank operations often do not go according to plan:

Sir, Your leader “Basel bends on liquidity rules” (January 8) asserts that: “Central banks can always provide liquidity, and while their facilities should not be a first resort for banks, the Basel Committee is right to signal it will incorporate access to them in its rules.”

You might have added: “But, central banks have a propensity to make a muddle out of what should be routine operations – like those associated with the provision of lender-of-last-resort liquidity.” The Bank of England provides the most recent evidence of this in what turned out to be a catastrophic government failure and arguably the start of the current financial crisis.

On August 9 2007 European money markets dried up after BNP Paribas announced that it was suspending withdrawals from two of its money market funds. This put Northern Rock – a profitable, solvent bank – in a liquidity squeeze. Northern Rock turned to the BoE for a relatively small infusion of liquidity.

This routine lender-of-last resort operation would have worked, according to the textbooks, but for a BoE leak to Robert Peston at the BBC. The BBC story broke on September 13 2007 and the next morning a devastating bank run ensued.

In a flash, Northern Rock went from being solvent (if temporarily illiquid) to bust. Indeed, it was government failure – the BoE’s bungled attempt to provide emergency liquidity – that transformed the Northern Rock affair from a minor, temporary liquidity problem to a major solvency crisis.

So, when it comes to central banks, there is often a wide gulf between the textbooks and reality. It’s time to close the book on Basel III and its liquidity coverage ratio, and to focus on fixing central banks, so that they can properly deliver liquidity, when needed, at a price.

Steve H. Hanke, The Johns Hopkins University, Baltimore, MD, US

To my surprise, what I thought was a simple factual clarification of a Financial Times editorial quickly drew the ire of none other than The Old Lady of Threadneedle Street. Indeed, Nils Blythe, the Bank of England’s communication director was quick to reply in the next morning’s FT:

Sir, In a recent letter (January 11) Professor Steve Hanke made the unsubstantiated claim that the Bank of England leaked information about a lender-of-last-resort operation at Northern Rock to the BBC. This claim is wholly untrue. As the governor made clear in evidence to the Treasury Committee of the House of Commons, the Bank wanted to provide support to Northern Rock covertly, precisely because of the risk of a run by retail depositors.

Prof Hanke also argues that Northern Rock was suffering “a minor, temporary liquidity crisis”. It is worth noting that even when it was supplied with abundant liquidity Northern Rock could not find a buyer and had to be nationalised. With hindsight it is clear that Northern Rock was an early example of the solvency crisis which gripped much of the banking sector in the following years.

Nils Blythe, Communications Director, Bank of England

To put it plainly, I am quite underwhelmed by Mr. Blythe’s argument and evidence. Although it would appear that his response is in line with standard central banking protocol, I found his letter quite concerning for two reasons.

Our Enemies or Our Allies?

The New York Times reports that congressional investigators have found mounting evidence that “American taxpayers have inadvertently created a network of warlords across Afghanistan who are making millions of dollars escorting NATO convoys and operating outside the control of either the Afghan government or the American and NATO militaries.”

The Financial Times broke this story back in March. But their most startling discovery was that after nearly a decade at war in Afghanistan, Washington still has no clue as to who its true enemies (and allies) are.

Many Americans would be surprised to learn that some prominent Afghan officials are in fact saboteurs of America’s presumptuous and dangerously quixotic nation-building endeavor, instituting policies that feed the insurgency’s momentum in order to get more economic assistance from the coalition. America’s Ambassador to Kabul, Karl W. Eikenberry, said as much last November. Eikenberry warned (of course, to no avail), that Afghan President Hamid Karzai, “continues to shun responsibility for any sovereign burden…He and much of his circle do not want the U.S. to leave and are only too happy to see us invest further.” [Emphasis added]

Karzai knows very well that once the conflict ends, his open aid spigot will dry up. Indeed, Karzai has become notorious for replacing and undercutting people in his government who become too well-liked and “clean,” fearing these officials will become more popular than himself. Such double-gaming leads us to Karzai’s younger half brother, Ahmed Wali Karzai.

He consolidates his power base by acting as the powerful chairman of Kandahar’s provincial council, as well as relying on a mafia-like network of militias, many of whom demand bribes from security companies that benefit from U.S. contracts. The rise of these militia fiefdoms have profited handsomely with foreign taxpayer dollars. “You have about 30 oligarchs who have built little empires with ISAF money,” Carl Forsberg, a researcher at the Institute for the Study of War, told the Financial Times. “We are ultimately creating a shadow government.”

Lamenting America’s strategic paradox, Congressman John F. Tierney (D-MA), chair of the U.S. House National Security and Foreign Affairs Subcommittee said recently: “In this case, the U.S. appears to be inadvertently fueling the very warlordism and corruption that we are pressing President Karzai to curtail.”

U.S. officials say perceptions that power in Kandahar is concentrated in the hands of the Karzai family’s ethnic Pashtun Popalzai tribe fuel support for the insurgency. According to a Pentagon assessment released April 28, Afghan public perceptions of Karzai’s anti-corruption efforts are “decidedly negative” and extend to international forces and the international community. U.S. defense officials also find that the “exploitative behavior” of some Afghan officials contributes to the insurgency’s success.

For far too long, U.S. officials and analysts have concentrated their focus on Pakistan. As regional expert Steve Coll notes, “If you think about it, the United States is essentially waging a proxy war against its own ally. The Taliban are a proxy of the government of Pakistan. We are an ally of the government of Pakistan. We are fighting the Taliban.”

But government officials in Kabul also fit into this equation; unfortunately, this is a government that Washington still endeavors to support.

Exiting the Afghan Quagmire

Maleeha Lodhi, Pakistan’s former ambassador to Washington, and Anatol Lieven, a professor at King’s College London, discuss in the Financial Times how we can exit the Afghan quagmire:

The west should therefore pursue a political solution, open negotiations with the Taliban and offer a timetable for a phased withdrawal in return for a ceasefire. This should begin with the military pulling out of specific areas in return for Taliban guarantees not to attack western bases and Afghan authorities in those areas. If the Taliban refuses such terms, then military pressure should continue. The point should not be to eliminate the Taliban – which is impossible – but to persuade it to agree to a deal.

Lodhi and Lieven’s argument echoes one that David Axe, Jason Reich, and I made yesterday on ForeignPolicy.com.

… regime change, and democracy, are not necessary for counterterrorism. Propping up President Hamid Karzai’s Western-style government in Kabul does not make operations against al Qaeda any easier or more successful. If anything, it distracts from the conceptually simpler task of finding and killing terrorists. Without U.S. and NATO protection, Karzai’s regime would, sooner or later, probably fall to the Taliban. But U.S. observers should not equate that eventuality with “losing” the war. The war is against terrorists, not Islamist governments. The United States should be prepared to make peace, and amends, with a resurgent Taliban – and to encourage the group to excise its more extreme elements.

I admit talking to the Taliban sounds weird and scary. But my contention is that there is no shortage of Pashtun militants willing to fight against what they perceive to be a foreign occupation of their region. Certainly the Taliban does not enjoy support among the majority of Pashtuns—as Lodhi and Lieven point out—but neither did the IRA in Northern Ireland or the FLN in Algeria. The point is not exclusively about popularity (although that’s a critical component, along with local legitimacy), but the fact that these indigenous groups are willing to fight the United States and NATO indefinitely. Indeed, it is the western military presence that is driving support for the Taliban both in Afghanistan and in Pakistan.

Moreover, the notion that we must protect Pakistan from the Taliban is ludicrous. Pakistan’s intelligence service helped create the Taliban and they continue to protect the Afghan Taliban to keep India at bay. From this point of view, deploying more troops would be irrelevant to the fight against al Qaeda and counterproductive in our attempts to pacify the region. For more on what we should do, check this out.